Congress recently approved a new kind of tax-saving account for the benefit of families with disabled children. It’s called an Achieving a Better Life Experience, or ABLE, account.
An ABLE account is a bit like a 529 college savings account. Family members and others can contribute to it on an after-tax basis, up to $14,000 per year each. The money in the account can be invested tax-free, and withdrawn tax-free for specified purposes. These purposes include a disabled beneficiary’s housing, education, transportation, health, employment support, and use of assistive technology.
The beneficiary must have become disabled before age 26, and can only have one account. Total contributions to the account are subject to the same limits as 529 accounts.
ABLE account assets are not considered in determining a beneficiary’s eligibility for Medicaid. Also, the first $100,000 in an account is not considered in determining eligibility for SSI benefits (except that distributions for housing will be considered income for SSI purposes).
Although ABLE accounts have been approved by Congress, all that really means is that Congress has allowed the states to set them up. It’s possible that not all states will adopt them, and even states that are eager to adopt them probably won’t have them up and running until sometime next year. You should also know that the rules and the exact tax benefits may end up varying from state to state, just as they do now for 529 accounts.
A big question will be whether a family with a disabled child should set up an ABLE account; a special needs trust, or both. ABLE accounts and special needs trusts have different advantages and disadvantages, and many people will find that the best plan is to have one of each.
For instance, a big advantage of the ABLE account will be that there’s no tax on either its gains or its distributions. Also, an ABLE account doesn’t require a trustee to manage it, and there’s no need to file an annual trust tax return.
On the other hand, special needs trusts can have more than $100,000 in them (in fact, they can have an unlimited amount in them) without triggering a suspension of SSI eligibility. Further, an ABLE account can be used only for specified purposes – housing, education, transportation, health, etc. A special needs trust can be used for all sorts of supplemental expenses – everything from haircuts and grooming and a wide variety of other needs – that aren’t paid for by Medicaid.
You should also note that if a beneficiary dies with assets still in an ABLE account, the assets must be used to repay the government for any Medicaid benefits that were provided after the account was set up. With a special needs trust, any remaining assets can go back to the family, and there’s no requirement to reimburse Medicaid.
In many cases, families will want to have both a special needs trust and an ABLE account. The trust can be used to hold larger, long-term investable assets and to provide for supplemental expenses, while the ABLE account can be used to save taxes while providing for nearer-term needs, and then spent down if the beneficiary has a limited life expectancy.